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Updated country risk assessments

Monday, 23 June 2014

Coface notes an improvement in risks in Western Europe and in "new" emerging economies.

The
first quarter of 2014 confirmed the acceleration in global growth:
according to Coface's forecasts, after 2.6% in 2013, growth will be
close to 3% in 2014 and 3.3% in 2015. The eurozone (1.1% expected in
2014) is slowly but surely recovering from a serious double-dip. The US
is showing dynamic and balanced growth (2.7% forecast in 2014), in spite
of bad weather in January. A rebalancing of growth is therefore
underway: advanced economies will contribute around a third of this
(compared to only a quarter in 2013) and emerging countries two thirds.

It is in the context of this confirmed recovery that Coface has
upgraded its assessments of several European and emerging economies.

Germany, Austria, UK and Spain: improvement based on increasing investment

The recovery in Western Europe has led to risk stabilisation, even improvement.

It has taken five years for Germany and Austria to return to the A1
best risk category, taking their places alongside the US, Japan and
Switzerland. Germany has confirmed its role as Europe's engine, with
remarkably balanced growth (estimated at 2% in 2014, after 0.5% in
2013): consumption, historically sluggish, is lively, and investment has
started again. The confidence of actors in the economy is therefore
high, buoyed by a drop in the number (-8% over one year) and cost (-30%)
of insolvencies. In Austria, companies are benefiting from the low cost
of credit and German, American and Eastern European recoveries, and are
cash-rich. Apart from the insolvency of Alpine Bau in 2013, company
insolvencies in the country have been falling for several months.

The UK has been upgraded to A2. Estimated at 2.7% in 2014, its
growth could be as dynamic as that of the US and could exceed Germany’s
(2%). The upturn in consumption is buoyed by a drop in unemployment.
British growth is now healthier, with strong corporate investment, which
will be a key driver of economic activity in 2014 and 2015.
Furthermore, the Bank of England has taken measures to limit the frenzy
over real estate and to favour SMEs’ access to credit. Lastly, British
industry is showing signs of renewal, characterised by dynamic
innovation, demonstrated by the export success of the pharmaceutical,
automotive, aeronautics and defence industries.

A further positive change for another economy in Europe very
affected by the crisis: Spain’s B assessment is now on a positive
watch.The Spanish recovery is accelerating, with growth of 1.2% forecast
for 2014 and 1.7% for 2015. Exports are progressing, favoured by
reduced labour costs, and are particularly dynamic for emerging
countries. Despite the private sector’s high debt, corporate
deleveraging is underway. We note a marked upturn in their financial
situation: they have re-established their margins (45% in 2013) and cash
flow (above 100%). High levels of unemployment and household debt
present major vulnerabilities. However, the signs of an upturn in
domestic demand, after remarkable export performances, constitute an
undeniable positive development.

Latvia is bearing the brunt of the geopolitical context in Russia and the Ukraine

Latvia, which has lost the positive watch of its B assessment,
suffers from dependence on Russia for its gas supplies. Geopolitical
tensions around Ukraine are likely to affect the confidence of Eastern
European players and the high dependence of the country on Russian gas
explains our withdrawal of the positive watch.

Kenya, Rwanda, Nigeria and Sri Lanka: high potential

Growth will remain high in emerging countries: 4.4% in 2014 and 4.7%
in 2015. They are still benefiting from expanding middle classes and
take advantage of advanced economies’ improved growth prospects,
particularly via their exports. However, the dynamism of the "major"
emerging economies will be limited by domestic supply constraints and
political and social risks.

Conversely, other promising emerging countries do not suffer, or
suffer little, from these weaknesses. Despite an often difficult
business environment, growth potential is particularly high in several
African and Asian countries. This finding leads Coface to improve by a
notch the country assessments of Kenya(B), Nigeria (C) and Rwanda (C).
Sri Lanka also benefits from buoyant growth (estimated at 7% in 2014 and
at 6.5% in 2015 by Coface) driven by consumption due to a sharp
increase in revenue and transfers from expatriates.

Sri Lanka and Kenya are part of 10 emerging countries that Coface has detected as promising emerging economies.

(Source - Coface Press Release)

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